Question
In: Finance
Period Project X Project Y 0 (1,000) (1,000) 1 7,000  
Period Project X Project Y
0 (1,000) (1,000)
1 7,000 0
2 4,000 0
3 5,000 18,000
4=10%
Compute payback for each project in whole years. Based solely on this method, which project do you choose?Compute discounted payback/ breakeven point in whole years. Based solely on this method , which project do you choose?Compute profitability index for each project. Based solely on this method, which project do you choose?Compute NVP for each project. Based solely on this method, which project do you choose?
Solutions
Expert Solution
1.Project X
Payback period= full years until recovery + unrecovered cost at the start of the year/cash flow during the year
= 0 year + $1,000/ $7,000
= 0 year + 0.14
= 0.14 years.
Project Y
Payback period= full years until recovery + unrecovered cost at the start of the year/cash flow during the year
= 2 years + $1,000/ $18,000
= 2 years + 0.06
= 2.06 years.
Based on the payback period method, I will choose Project X since it has the shortest payback period.
2.Project X
Discounted payback period= full years until recovery + unrecovered cost at the start of the year/ discounted cash flow during the year
= 0 year + $1,000/ $6,363.64
= 0 year + 0.16
= 0.16 years.
Project Y
Discounted payback period= full years until recovery + unrecovered cost at the start of the year/ discounted cash flow during the year
= 2 years + $1,000/ 13,523.67
= 2 years + 0.0739
= 2.07 years.
Based on the discounted payback period method, I will choose Project X since it has the shortest discounted payback period.
3.Project X
Profitability index is calculated using the below formula:
Profitability Index= NPV + Initial investment/ Initial investment
Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:
- Press the CF button.
- CF0= -$1,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.
- Cash flow for each year should be entered.
- Press Enter and down arrow after inputting each cash flow.
- After entering the last cash flow cash flow, press the NPV button and enter the interest rate of 10%.
- Press enter after that. Press the down arrow and CPT buttons to get the net present value.
Net present value at 10% interest rate is $12,425.9955 $12,426.
Profitability Index= $12,426 + $1,000/ $1,000
= $13,426/ $1,000
= 13.43.
Project Y
Profitability index is calculated using the below formula:
Profitability Index= NPV + Initial investment/ Initial investment
Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:
- Press the CF button.
- CF0= -$1,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.
- Cash flow for each year should be entered.
- Press Enter and down arrow after inputting each cash flow.
- After entering the last cash flow cash flow, press the NPV button and enter the interest rate of 10%.
- Press enter after that. Press the down arrow and CPT buttons to get the net present value.
Net present value at 10% interest rate is $12,524.
Profitability Index= $12,524 + $1,000/ $1,000
= $13,524/ $1,000
= 13.52.
Based on the profitability index method, I will choose project Y since it has the largest profitability index.
4.Project X
Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:
- Press the CF button.
- CF0= -$1,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.
- Cash flow for each year should be entered.
- Press Enter and down arrow after inputting each cash flow.
- After entering the last cash flow cash flow, press the NPV button and enter the interest rate of 10%.
- Press enter after that. Press the down arrow and CPT buttons to get the net present value.
Net present value at 10% interest rate is $12,425.9955 $12,426.
Project Y
Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:
- Press the CF button.
- CF0= -$1,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.
- Cash flow for each year should be entered.
- Press Enter and down arrow after inputting each cash flow.
- After entering the last cash flow cash flow, press the NPV button and enter the interest rate of 10%.
- Press enter after that. Press the down arrow and CPT buttons to get the net present value.
Net present value at 10% interest rate is $12,524.
Based on the net present valuemethod, I will choose project Y since it has the largest net present value.
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